The Palla Pharma Ltd (ASX: PAL) share price was an impressive performer on the ASX today. Despite a number of gains across the board, Palla Pharma stood out with a big 27.46% share price rise in intra-day trading. As the day went on, Palla Pharma shares pulled back from these levels and closed 12.68% higher at 80 cents per share.
About Palla Pharma
Palla Pharma is a growing global supplier of opiate-based pain relief medicines. It is a fully-integrated opiate manufacturer, involved in a number of activities from poppy straw growing through to tableting production.
The company is one of three licensed poppy processors in Australia, and the only Australian-owned company. Additionally, it is one of six licensed opiate producers globally.
The company was founded in 2004 as TPI and rebranded in 2019. ASX investment house Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) is a major shareholder and its CEO, Todd Barlow, sits on the Palla Pharma board.
What caused the Palla Pharma share price to spike?
This morning, Palla Pharma announced it would not be going ahead with the acquisition of a major UK customer – ending almost a year's worth of negotiations.
Since July 2019, Palla Pharma has been in discussions with its largest UK customer, a manufacturer of finished dosage codeine phosphate, regarding the potential acquisition of the customer's UK operations. This was part of Palla Pharma's strategy to continue to move down the value chain.
According to Palla Pharma, the customer's manufacturing site has the capacity to tablet over 120 tonnes of codeine phosphate. This equates to revenue of approximately US$120 million.
Acquisition discussions intensified earlier this year after the UK regulator imposed a 3-month suspension of the customer's operating license. The suspension resulted in a need for working capital and management support, which was provided by Palla Pharma. To address the customer's working capital needs, Palla Pharma acquired 4 of the customer's marketing authorisations for the supply of codeine-based products into the UK.
In return for its management assistance and investment of resources in the due diligence process, Palla Pharma noted it had been given an "option to acquire the business at an attractive valuation".
Fast forward to April and Palla Pharma announced it had acquired further marketing authorisations from the customer. Despite electing not to exercise the option, Palla Pharma stated it was in advanced negotiations with the owners and senior creditors in regard to the potential acquisition. However, there remained "material differences between the parties with respect to valuation".
All of this takes us to today's announcement, in which Palla Pharma revealed it had ceased negotiations with the customer as it became evident a commercial agreement could not be reached.
What now?
The UK customer has been recapitalised by a new minority shareholder and Palla Pharma stated it will be seeking to have its current outstanding invoices for codeine phosphate supply in 2019 paid in full.
While exploring the possible acquisition, Palla Pharma acquired 7 marketing authorisations from the customer, which accounted for approximately 70% of the customer's revenue. The ownership of these authorisations has been transferred to Palla Pharma and manufacturing is in the process of being transferred to the company's Norway site.
Looking forward, Palla Pharma expects earnings in the second half of FY20 to be "significantly stronger" than the first half. This comes as the company finalises the transition of its sales profile from volume-based commodities to higher-value products. As a result, Palla Pharma anticipates a material uplift in full-year earnings.
Palla Pharma is set to hold its AGM on Thursday, 28 May, where it will provide a more detailed trading update and outlook.
